Causes and Consequences of the Global Financial Crisis - Essay Example

Section/# An Analysis of Global Financial Crises Introduction: Regardless of the way in which economic crises are analyzed, it is clear and apparent that litanies of different causes are to blame for the way in which these crises transpire. Therefore, instead of taking an overly simplistic approach to these situations and determining that one or two causal factors can be determined to be the root cause of some of the greatest financial crises of the past 15 years, the following analysis will instead engage the reader with a full and complete analysis of a range of different causes that contributed to five of the most profound economic crises that have taken place within the immediate past. These five crises include the following: the East Asia crisis, the Argentinean crisis, the Russian crisis, the Greek crisis, and the subprime mortgage crisis. Through understanding the causal mechanisms that ultimately contributed to each of these economic realities, it is the hope of this author that the reader can gain a more informed and relevant understanding with respect to the ways in which future crises could potentially be prevented. Whereas it is true that history does not repeat itself precisely in the same way that it was evidenced in the past, inference with regards to economic growth, inflation, hardship, debt, and all of the factors that will be engaged within this analysis can assist the reader in helping to have a more thorough and contemplative understanding of future crises that will doubtless be exhibited within the coming years. Before delving directly into the research, it must be noted that even though the factors that will be represented are broadly agreed to have had a contributing impact upon the respective situations at hand, these only represent the most powerful contributing economic factors; due to the fact that a full and nuanced discussion of all potential contributing factors would necessarily degenerate into a dissertation length response. Moreover, the key differential and dissimilarity in causation for these crises will provide the reader with a useful level of inference concerning the overall similarity in causation that exists between all five of these economic crises. The East Asia Financial Crisis: As with many economic crises, the East Asia financial crises was first evidenced within a specific nation of a particular region. Ultimately, the East Asia financial crisis was first noted within Thailand. For decades, the Thai economy had existed by keeping the Thai Baht fixed to the United States dollar. This approach had worked relatively well for Thailand as it had been able to whether any of the prior financial crises that had gripped the region with a relative level of stability. As long as the United States remained a strong ally and the United States dollar dominated global currency exchange, the overall level of stability that the Thai government, and by extension the economy, experience was extraordinarily beneficial. Yet, the situation that has previously been described is partially predicated upon stagnation. What is meant by this has to do with the fact that the Thai economy was leveraging its growth by ensuring that its currency remained pegged to the dollar. Yet, as the Thailand’s economy began to exhibit signs of “heating up”, pressure to increase the overall level of government spending commensurate with the level of financial development that was taking place was profound. Eventually giving into this pressure, the Thai economy began to expand its overall currency level. What this created was a situation in which it was increasingly difficult for the Thai government to continue to peg the Thai baht to the US dollar. Even though this proposition was increasingly difficult, the Thai government insisted on maintaining this relationship. As such, foreign currency reserves were soon drying up within the country as a ballooning level of private debt, financial overextension, and a real estate driven economy saw the need for monetary expansion within Thailand. Not surprisingly, the Thai government was not the only one that was facing the unique determinants that have thus far been defined. By means of comparison and contrast, Malaysia, Singapore, Taiwan, the Philippines, and Indonesia were all drastically affected by the same fundamental issues that have thus far been defined. Within a matter of a few months, the inability of these nations to continue to stave off the Specter of foreign debt created a situation in which each of these nations, with the exception of Singapore, said saw a situation in which foreign debt to GDP ratios rose by nearly 50%. Ultimately, if a level of comparison can be engaged between each of these nations, it has to do with the fact that a runaway level of capital investment did not directly translate to levels of overall economic growth. Although economists continue to argue over what the root cause of the South East Asian financial crisis was, individuals such as Paul Krugman have noted that a level of over optimism saw individuals in both the private and government sectors of these economies leverage debt as a means of maximizing future capital (Monk, 1998) However, as the economist this point out, capital investment in and of itself is relatively worthless; unless of course a direct level of increase in revenue can be expected as a result of this increasing capital. Still, other economists point to the fact that economies being based upon the ability of the central bank to ensure a direct relationship between a domestic currency and a foreign currency is ultimately blame for the situation. Due to the fact that the economies of East Asia were developing at a different rate and sought to monetize their debt and different manners, continuing to force these economic entities into a situation of deriving the worth of their currencies based upon the dollar can only create a situation in which an untenable level of growth or retraction is expected to take place as the differential between these nations white. Argentina Crisis: As has been stated within the introduction, although it might be tempting to provide a level of direct comparison to each of the economic crises that will be discussed, the Argentina crises is a prime example for why such a level of comparison oftentimes does not work. Ultimately, the situation that transpired in East Asia in 1997 was the direct result of economies that were expanding at a rapid rate; and unable to deal with the mounting a monetary pressures that a fixed exchange rate required. By means of contrast, the Argentina crisis was precipitated by decades of economic hardship and recession. Ultimately, prior to the Argentina crisis of 2001, decades of military dictatorships had created massive levels of foreign debt (Social Genocide, 2004). In addition, tens of thousands of domestic projects were begun under these military dictatorships that were never finished. As such, even though many of these products could have portended a great economic benefit to the people and economy of Argentina, they were never realized and only served as a debt for the future. Further, the extraordinarily costly war with the United Kingdom, over the Falkland Islands, created even further debt that Argentina and its fragile economy were shouldered with. In addition to losing this battle and being forced to withdraw its immediate claim to legitimacy over the Falkland Islands, the economy of Argentina further suffered the censure from the global community and lack of trade that this overly aggressive stance precipitated. Within this political dynamic, the past decades saw Argentina experience extraordinarily high levels of inflation. Once again, as a means of attempting to normalize the situation and reign in this inflation, the newly democratically elected government of Argentina began to peg the currency to the United States dollar. Whereas this works temporarily, many economists point to the fact that the historical fear and contingent reality of default and inflation cause a situation in which individuals within Argentina began to distrust the government and to convert the Argentinean currency to the United States dollar; seeing this as a safer bet against the unpredictable swings of fiscal policy that the government was initiated. Due to the fact that the newly elected Democratic government had introduced and “convertibility law” that allowed for individuals within Argentina to freely convert their own domestic currency the United States dollar, this fixed exchange rate helped not only to stabilize the situation for a brief period of time but also to further fanned the flames of fear as economic policy within Argentina became more unpredictable (Jones, 1994). Further, economists have noted the fact that the fixed exchange rate was ultimately responsible for reducing the cost of imports; this not only caused a situation in which dollars were seemingly evaporating from the Argentinean economy, it also cause a situation in which the Argentine currency was viewed as unnecessary and weak. As the economic situation began to worsen within Argentina and the hesitancy of the government was understood by its population, massive amounts of money was being withdrawn from Argentine bank accounts and converted directly into US dollars. Naturally, this created a situation in which the foreign currency reserves of Argentina were reduced in a period of only a few days; effectively creating a situation in which limits had to be placed upon the overall sum of money that can be withdrawn during a period of time (Lewis, 2009). Although the bank run was a precipitating cause of the Argentine crisis, it must also be noted that certain economists have pointed to the fact that a rampant culture of corruption was partially to blame for the situation that transpired. As a result of the decades of military rule, government bureaucrats had ingratiated themselves sufficiently with the existing government so that much of the profitability that the economy would otherwise experience was siphoned off and utilized for personal gain. Invariably, as with many situations of corruption, the money that was siphoned off by these individuals did not remain within the nation itself; instead, it was forwarded on to nations outside of Argentina and stored in different currencies -further contributing to the ability of the Argentine currency to be paid to the dollar. Russian economic crisis 1998 In comparison to the Argentine crisis, the Russian economic crisis of 1998 was at least partially contributed to by the debt associated with war and conflict. The first Chechen war ultimately cost the Russian Federation thousands of lives and upwards of $10 billion in debt. Further, unknown levels of debt were also created as a means of rebuilding the destroyed region once the conflict drew to a close. In similarity to both the East Asian crisis and the Argentine crisis, part of the Russian economic crisis was contingent upon the artificially high exchange rate that existed between the Russian ruble and the United States dollar. At the time that the crisis began, the Russian ruble was being traded between five and seven per US dollar. However, by the time the crisis ended, the rate of inflation had increased to 22 rubles being traded for every US dollar. However, before assuming that the case of the Russian economic crisis of 1998 was somehow similar and directly comparable to the two crises that have thus far been related, it must further be understood that an overreliance upon oil and natural gas partially contributed to the collapse took place. Since the dissolution of the Soviet Union, the Russian Federation found its industrial base hopelessly behind the rest of the world; both in terms of technology and in terms of overall production capacity (Mau, 2013). As such, the single greatest contribution to the global economy that the Russian Federation was able to make was by means of selling its vast oil and natural gas resources. In such a way, the Russian economy soon found itself in a position of overreliance upon these resources. Many economists directly equate this level of overreliance that the Russian Federation experience with what has become known as “Dutch disease” (Stiglitz, 2001). That’s disease refers to the overreliance upon natural gas resources that the Dutch economy experienced during the 1970s. As natural gas prices continue to increase around the globe, the Netherlands engaged in natural gas extraction that consumed a larger and larger percentage of their total economic output. What this ultimately contributed to was a situation in which the Dutch economy was highly exposed to fluctuations in the price of the natural gas commodity. In much the same way, the Russian Federation, both in 1998 as well as today, faced a situation in which the revenue from oil and gas was a contingent dependency upon which the economic power and strength of the ruble relied. Rather than facing the consequences of floating the ruble freely, the Russian government at that time insisted upon a policy of maintaining the peg to the US dollar. This eventually contributed to a situation in which bond earnings increased to 200% as a means of luring investors. However, panic soon spread throughout the economy and the Russian stock market lost nearly 65% of its total value within a few brief hours. In addition to this, workers throughout the Russian Federation were experiencing a situation in which they had gone unpaid for a period of weeks; oftentimes months. Yet, in the face of all of these hardships, the Russian government expended $27 billion in foreign currency reserves as a means of maintaining the ruble to dollar value range; an action that would ultimately be futile in the long run. Eventually, the situation only began to normalize once a massive inflation in the ruble to dollar currency exchange was evidenced. Greek Crisis: From the information that is thus far been presented, it can definitively be understood that the situation in Greece is dire in the extreme. Before the collapse of 2008/2009, few individuals were aware of the fundamental flaws that the Greek economic system exhibited. However, as a result of pressure that was placed upon the European Union and the need for integration and cooperation from its entire member entities, the fault lines and exposure of the Greek economy to high levels of unsustainable debt were evidenced to the entire world (Chalaniova, 2013). Interestingly, news articles and public opinion tended to believe that Greece would default and the European Union would be faced with the question of whether to integrate further whether to dissolve entirely. Although this is still very much a reasonable expectation with respect to the outcome of the PIIGS in Europe (Portugal, Ireland, Italy, Greece, and Spain), a more likely scenario that is been exhibited over the past several years is the fact that the European Union will continue to bankroll the debt of Greece, and country similar to it, as long as the central bank of Europe has the wherewithal to continue bankrolling the liabilities of this small southern European nation. Beyond merely have a negative connotation with regards to the way in which the Greek economy will grow in the very near future, what has been created is a situation through which Greece cannot hope to recover. Under the confines of the existing structure, debt, and the repayment thereof, and compliance with a litany of regulations and stipulations from the EU will continue to define the way in which the economic, political and social future of Greece is shaped. Yet, besides merely impacting upon the economic and political life of Greece, this situation also has a profound level of impact upon the demographics of the nation (Vlamis, 2014). Studies have recently been conducted that note that the young people of Greece see little if any future within their country; and are rapidly seeking to emigrate. A further socio-cultural impact that this debt burden is having is with regards to the decision of those individuals who choose to remain in Greece not having children. Such a decision is of course rooted in financial choices; however, the long-term repercussions of such an approach will only serve to further harm the ability of the Greek economy to recover from the hardships it currently faces. Subprime Mortgage Crisis: The financial crisis of 2007/2008 was predicated by the banks which had leveraged bad debt in order to create more debt for their clients. Ultimately, this can understood as a situation in which certain types of outstanding credits that eh bank had in the form of loans to various entities or stock market derivatives were falsely identified as suitable contingents upon which further money could be “created” and/or loaned within the financial system. By constraining the amount of capital that could be raised/borrowed from investors and by striking at the underlying stock values of these financial institutions, the means whereby the banks could continue to loan and borrow were fundamentally reduced (Stiglitz, 2010). By attacking the very mechanism whereby a bank can operate and hope to engage with consumers and turn a profit, the financial crisis was able to disable a number of banks and financial institutions; both large and small. However, as the crisis bore down on these banks and other entities within the economy, it was soon understood that the levels of debt and exposure to bad debt that the banks had on their books were ultimately untenable (FAHLENBRACH et al, 2012). Firstly, with regards to the banking and economic meltdown that occurred between 2007/2008, this must be understood as a global crisis. Although it began in the United States as a result of the subprime mortgage crisis, it rapidly spread globally and has affected every extant economy in the world; slowing growth, diminishing export strength, and devaluing a litany of world currencies in the process. Conclusion: From the information that has thus far been analyzed, it is clear and apparent that the respective financial crises that have been referenced are as dissimilar as they are similar. Although it might be tempting and convenient to draw a line of comparison between all of them and state that a specific issue of monetary policy or economic hardship exists between each, unique differences with respect to the makeup of the economy, the level and extent to which economic growth has taken place, the preponderance of debt, and/or the maturity of the monetary system all have a profound impact with regards to the way in which these crises are experienced. Yet, considering all of these factors, it must be stated that a core similarities it does exist is predicated upon the fact that nations which attempts to maintain failed policies in the face of changes in the global economy invariably find themselves in an even greater level of difficulty as compared to the alternative choices they could have made in the initial stages of the crisis. Within such an understanding, it is clear and apparent that such nations should be fundamentally focused upon all available alternatives at each and every juncture; rather than concluding that maintaining the status quo is always the best way out. Bibliography Chalaniova, D 2013, Turn the Other Greek. How the Eurozone Crisis Changes the Image of Greeks and What Visual Representations of Greeks Tell Us about European Identity, Perspectives: Central European Review Of International Affairs, 21, 1, pp. 5-41, Academic Search Complete, EBSCOhost, viewed 14 March 2014. Jones, G 1994, The Evolution of International Business, London: Routledge Lewis, M. 2009. Panic. New York: W.W. Norton & Co. Mau, V 2013, Between modernisation and stagnation: Russian economic policy and global crisis, Post-Communist Economies, 25, 4, pp. 448-464, Business Source Complete, EBSCOhost, viewed 14 March 2014. 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